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Expense Ratio

The expense ratio is the annual fee that all funds or ETFs charge their shareholders. It expresses the percentage of assets deducted each fiscal year for fund expenses, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund.

Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio, which is deducted from the fund's average net assets, is accrued on a daily basis.

If the fund's assets are small, its expense ratio can be quite high because the fund must meet its expenses from a restricted asset base. Conversely, as the net assets of the fund grow, the expense percentage should ideally diminish as expenses are spread across the wider base. Funds may also opt to waive all or a portion of the expenses that make up their overall expense ratio.

Annual Gross Expense Ratio
This is the percentage of fund assets paid for interest expense, operating expenses and management fees. The expense ratio typically includes the following types of fees: interest and dividends on borrowed securities, accounting, administrator, advisor, audit, board of directors, custodial, distribution (12b-1), legal, organizational, professional, registration, shareholder reporting, sub-advisor, and transfer agency. The expense ratio does not reflect the fund’s brokerage costs or any investor sales charges. In contrast to the net expense ratio, the gross expense ratio does not reflect any fee waivers in effect during the time period.

Often referred to as the Audited Gross Expense Ratio, Morningstar pulls the annual gross expense ratio from the fund’s audited annual report. Annual-report expense ratios reflect the actual fees charged during a particular fiscal year, while prospectus expense ratios reflect material changes to the expense structure for the current period.

Annual Net Expense Ratio
This is the percentage of fund assets paid for operating expenses and management fees. The expense ratio typically includes the following types of fees: accounting, administrator, advisor, auditor, board of directors, custodial, distribution (12b-1), legal, organizational, professional, registration, shareholder reporting, sub-advisor, and transfer agency. In contrast to the gross expense ratio, the net expense ratio does reflect fee waivers in effect during the time period, and does not include interest and dividends on borrowed securities. The expense ratio does not reflect the fund’s brokerage costs or any investor sales charges.

Often referred to as the Audited Expense Ratio, Morningstar pulls the annual net expense ratio from the fund’s audited annual report. Annual-report expense ratios reflect the actual fees charged during a particular fiscal year, while prospectus expense ratios reflect material changes to the expense structure for the current period.

FINRA Guidance (“Material Fund Performance Sales Material”, NASD circa 2006) explains that funds are required to disclose a fund’s total annual operating expense ratio, gross of any fee waivers or expense reimbursements. In addition, funds are able to present a subsidized expense ratio, as long as it is presented in “a fair and balanced manner.” If a subsidized expense ratio is provided, the fund should also present whether the fee waivers or expense reimbursements were voluntary or mandated by contract, along with the time period during which the fee waiver or expense reimbursement obligation remains in effect.

The FINRA Guidance does not define a subsidized (or “net”) expense ratio; it also does not limit what should or should not be removed from the gross expense ratio. It instead offers up the option of displaying the net expense ratio as a supplement to the gross. Morningstar obtains the gross expense ratio for funds from the fund’s audited annual report.

Morningstar provides a net expense ratio which reflects fee waivers and the removal of interest and dividend expense, where they are reported. Morningstar elects to exclude interest and dividend expense from the net expense ratio in order to provide the end investor with an apples-to-apples comparison of expense ratios. Depending on the leveraging techniques employed by the fund, the fund may or may not be required to report interest and dividend expense. For example, funds that employ shorting strategies or reverse-repo transactions are required to report interest expense in the Annual Report whereas funds that employ futures, swaps, TBAs, and forwards are not required to report the cost associated with those instruments as interest expense. In addition, interest costs in general can vary widely depending on the economic environment, the tools involved, and the magnitude in which they're being used. Because of these differences, Morningstar backs all interest and dividends on borrowed securities from the gross value to calculate the net expense ratio so that investors can compare a consistent value across different investment types.

Please note that Morningstar can only collect the net expense ratio with interest and dividend expense backed out if it is reported as such in the annual report. Morningstar is not able to make adjustments to these audited figures.

Prospectus Gross Expense Ratio
This is the percentage of fund assets paid for operating expenses and management fees. The expense ratio typically includes the following types of fees: accounting, administrator, advisor, auditor, board of directors, custodial, distribution (12b-1), legal, organizational, professional, registration, shareholder reporting, sub-advisor, and transfer agency. The expense ratio does not reflect the fund’s brokerage costs or any investor sales charges. In contrast to the net expense ratio, the gross expense ratio does not reflect any fee waivers in effect during the time period.

Also known as the Total Annual Fund Operating Expense Ratio, Morningstar pulls the prospectus gross expense ratio from the fund’s most recent prospectus. Prospectus expense ratios reflect material changes to the expense structure for the current period, while annual report expense ratios reflect the actual fees charged during a particular fiscal year.

Prospectus Net Expense Ratio
This is the percentage of fund assets paid for operating expenses and management fees. The expense ratio typically includes the following types of fees: accounting, administrator, advisor, auditor, board of directors, custodial, distribution (12b-1), legal, organizational, professional, registration, shareholder reporting, sub-advisor, and transfer agency. The expense ratio does not reflect the fund’s brokerage costs or any investor sales charges. In contrast to the gross expense ratio, the net expense ratio does reflect fee waivers in effect during the time period.

Also known as the Total Annual Fund Operating Expense Ratio Net of Reimbursements, Morningstar pulls the prospectus net expense ratio from the fund’s most recent prospectus. Prospectus expense ratios reflect material changes to the expense structure for the current period, while annual report expense ratios reflect the actual fees charged during a particular fiscal year.

Morningstar provides a prospectus net expense ratio which reflects fee waivers and the removal of interest and dividend expense, where they are reported. Morningstar elects to exclude interest and dividend expense from the prospectus net expense ratio in order to provide the end investor with an apples-to-apples comparison of expense ratios. Depending on the leveraging techniques employed by the fund, the fund may or may not be required to report interest and dividend expense. In addition, interest costs in general can vary widely depending on the economic environment, the tools involved, and the magnitude in which they're being used. Morningstar backs all interest and dividends on borrowed securities from the gross value to calculate the prospectus net expense ratio so that investors can compare a consistent value across different investment types.

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